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A university study found that 25 percent of Russian men died before the age of 55 in 2014, and alcohol was an influencing factor in their early deaths
A university study found that 25 percent of Russian men died before the age of 55 in 2014, and alcohol was an influencing factor in their early deaths. The Russian government has settled the minimum price of vodka since 2014. However, because of the falling oil prices and western sanctions, the Russian ruble fell sharply in 2015 and the inflation rate hit 9.4 percent in this period. Vodka prices have risen about 30 percent in the following year. According to a BBC report on December 24th 2015, Russian President Putin has ordered the government to limit the rise in vodka prices. Putin said the rising prices of vodka led people to buy illegal and unsafe alcohol and that the government should also crack down on the illegal trade.
Question: please use the supply and demand model to explain the impact of the Russian government's vodka policy adjustment on the market from 2014 to 2015.
Expert Solution
Alcohol consumption led to 25% of men dying before the age of 55 in 2014. Vodka prices rose because of western sanctions, ruble depreciating and inflation rate. Thus the prices rose well beyond what the consumers could afford, which led to them buying cheap illegal alcohol which put greater risk on their health and safety.
Thus based on the Russian government's vodka adjustment policy, it is going to limit the rise in vodka prices. While according to the demand and supply model the price is quite high.
Thus based on normal market conditions the price of vodka was higher at P. However because of Russian government's vodka policy adjustment, there was a price ceiling imposed by the government which led to lower price and higher quantity demanded at Qd. This will increase consumption of legal alcohol, thereby reducing the consumption of illegally procured alcohol.
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